Russia: Stock Market

9/31/01

As of Apr 19, 2002476.44 a gain of 39% YTD

010099989796

600

500

400

300

200

100

0

RTS Index

Russia: Unemployment Rate

010099989796959493

16

14

12

10

8

6

4

Percent

Russian Budget and Oil Prices

019997959391

4

2

0

-2

-4

-6

-8

-10

-12

24

22

20

18

16

14

12

10

Percent of GDP $ Per Barrel

Budget Surplus (L)

Oil Price (R)

Russian GDP Per Capita

02E01E009896949290

3500

3000

2500

2000

1500

1000

500

0

Constant 1990 US$

23402144

1787

1326

1927

29642836

2281

1884

1167

583428

271

Russian Exchange Rate and Inflation

2001200019991998199719961995

350

300

250

200

150

100

50

0

-50

Percent Change

Ruble/$Devaluation

Inflation

Russian Real GDP Growth

Growth Rate

3.5% 2002 Est.

02E009896949290

10

5

0

-5

-10

-15

-20

Percent

Property RightsCorruption

7

6

5

4

3

2

1

Max. Index = 7

Socio-Economic Development is Urgently Needed

US

World

Russia

Russia Ranked Near Bottom of 2002 Milken Institute Capital Access Index

Opacity IndexCapital Access Index

7

6

5

4

3

2

Max. Index = 7

US #3

World

Russia #93

A Place In The Sun

"To secure our place under the economic

sun, we have to fight by ourselves."

President Vladimir PutinApril 18, 2002

Russia Banking Needs Reform

512

2530 30

3543 44

52

68

80

31

0

20

40

60

80

100

Venezu

elaPhilip

pines

Mexi

coSou

th Kore

aArg

entin

aThail

and

Turkey

Taiwan

Indonesi

a

Brazil

Russia

India

Percent of Total Bank Assets

State-Owned Bank Assets

Russia: Trade Balance

2001200019991998199719961995199419931992

12

10

8

6

4

2

0

-2

US$ Billions

Russia: Lending Rates and Inflation

Lending Rate18.2% Jan 2002

Inflation

20012000199919981997

100

80

60

40

20

0

Percent

200120001999

300

250

200

150

100

50

1999 = 100

Nominal

Real

Diverging Dollar Exchange Rates in Russia…

Russia in 2002?

34.832.9Exchange Rate (Rb/$)

54.155.9Import ($ Billions)

92.6109.9Export ($ Billions)

3.14.3GDP Growth (%)

16.523.5World Crude Oil Price ($/Barrel)

PessimisticOptimistic

Political LandscapePutin has benefited from both high public

approval and a compliant Duma

0%

20%

40%

60%

80%

100%

Fatherland-All Russia

Communist Party

Unity

Other

Union of Right Forces

Yabloko

Zhirinovshy Bloc

March 2002

72%Approve actions of

Putin

Supporter of

Putin

ReformsFor the first time in the history of modern Russia,

significant reforms are being implemented2001 20022000

Judicial Reform

Business DeregulationLabor Cost

Banking ReformLand Code

Bankruptcy Reform

Pension ReformNatural Monopolies

Tax Reform

Solid MacroeconomicsRussian macroeconomic indicators

remain very attractive among emerging economies.

-12%

-8%

-4%

0%

4%

8%

12%

ChinaIndiaKore

aRussi

aIndon

esia

Thailand

South Africa

Poland

Turkey

Brazil

Mexico

Argentin

a

-8%

-4%

0%

4%

8%

12%

Argentin

aRussi

aThaila

ndIndon

esia

Korea

China

IndiaSouth Afri

caTurk

eyPola

ndBra

zilMex

ico

PercentGrowth Rate, 2002E Current Account, 2002EPercent of GDP

Solid MacroeconomicsRussian macroeconomic indicators

remain very attractive among emerging economies.

-10%

-5%

0%

5%

10%

15%

Indonesi

aArge

ntina

Russia

South Africa

Korea

Thailand

ChinaBra

zilMex

icoIndia

Turkey

Poland

-20%

-16%

-12%

-8%

-4%

0%

4%

Korea

Russia

Mexico

South Africa

Indonesi

aArge

ntina

Thailand

IndiaBra

zilChinaPola

ndTurk

ey

Percent of GDPTrade Balance, 2002E Fiscal Budget, 2002EPercent of GDP

Fixed Income vs. EquityRussian sovereign debt is already trading at lower yield than

Global Emerging Markets.1400

1200

1000

800

600

400

Basis Points

EMBI Russia Bond Spread

EMBI Global Emerging Markets Spread

4/15/021/1/021/1/01

636

468

Fixed Income vs. EquityDespite the recent rally, Russia remains one of the the

cheapest emerging equity market in the world.

P/E Ratios of Emerging Markets, 2002E

0

5

10

15

20

25

Taiwan

Argen

tina

Phillippine

sM

alaysi

aChil

iThail

and

China

Poland

Mex

ico

MSCI E

merg. M

kt.Kor

eaIn

diaCzec

h Rep

.Rus

siaBra

zilIndon

esia

Times

0

1000

2000

3000

4000

5000

6000

2001 2002E

MicroeconomicsAccess to capital markets means that there will be no more need for Russian companies

to hold such piles of cash and, therefore, they will pay greater dividends in future.US$ Million

US$1250 Million

US$5362 Million

YTD

Russian Federation

Oil Acquisition Story Whereas there are only few places in the world with privately-

held oil companiesBreakdown of Global

Hydrocarbon ReservesBreakdown of Privately-Owned

Hydrocarbon Reserves

Other13%

Iran13%

Saudi Arabia16%

Privately-Owned Reserve

28%

Venezuela5%Algeria

2%Lybia2%

China2%

Kuwait6%

Iraq7%

UAE7%

U.K.2%

Brazil2%

U.S.12%

Mexico7%

Indonesia4%

Norway3%

Russia70%

Oil Acquisition Story

1.0

4.1

0

2

4

6

8

10

12

Statoil

Nors

k-Hyd

roCon

co ENIRep

solTota

lFinaElf

AverageShell BP

Russian A

verage

SibneftYukos

Surgutneft

egazLukoilTatn

eftGazp

rom

US$ per Barrel of Oil Equivalent

Price per Barrel of Reserve for Russian

Companies

Average Cost of Adding New

Reserves for Global Oil Companies

78% Discount

It is much cheaper to buy Russian assets than find new reserves

Case Study: SberbankCheap valuations

3.8

0

5

10

15

Bank Pekao

Ceska Sporitelna

OTP Bank

Bankco Santiago

CreditcorpPBK

Bank of India

Banco Bradesco

Zagrebacka Banka

National Bank of Greece

Banco Itau

ICICI Ltd.

Sberbank

Price / Earning Ratios for Major Emerging Markets Banks

P/E

P/BV

1.02

0

1

2

3

OTP Bank

Bank Pekao

Banco Itau

Bankco Santiago

Ceska Sporitelna

Banco Bradesco

National Bank of Greece

Zagrebacka Banka

Bank of India

SberbankPBK

Creditcorp

ICICI Ltd.

Price / Book Value for Major Emerging Markets Banks

Case Study: SberbankIn December 2000, Sberbank announced it wanted to sell 68% discount to book value in a new issue without granting rights to existing investors

Central Bank Central Bank

To Be Sold

0

5

10

15

20

Before New Issue Proposed New Issue

Investment Companies Individual

5 Million New

Shares will be sold for approx. $173M

Million Shares

14,002,000

19,000,000

Other

36 % Increase

0

20

40

60

80

100

120

140

160

May

-99Ju

ly-99

Septem

ber-99

Novem

ber-99

Januar

y-00

Mar

ch-00

May

-00Ju

ly-00

Septem

ber-00

Novem

ber-00

Januar

y-01

Mar

ch-01

May

-01Ju

ly-01

Septem

ber-01

December-

01Feb

ruar

y-02

April-02

Case Study: SberbankSince Sept. 25th Sberbank’s share price tripled

- Medium-term downtrend - The stock gets “very boring”

Sberbank dilutes minority shareholders

Market starts to realize that Sberbankcan not issue new shares without granting pre-emptive rights to shareholders

Hermitage fights Sberbank and puts member on board to block future issues

Share price of Sberbank (US$)

2 equity analysts issue BUY recommendations for the first time

+387% since

October 1, 2001

Case Study: GazpromGazprom is the cheapest oil and gas company in the world because

market believes that 96-98% of its assets are stolen

EV per Reserves

EV Per Production

LUKOILSurgutneftegaz

YUKOSSibneft

PetrochinaPerez Companc

PetrobrasSinopec

ChevronTexacoShell T&T

Royal DutchTotalFina ELF

BPENI

ExxonMobil

16

14

12

10

8

6

4

2

0

200

150

100

50

0

US$ Per Barrel

Case Study: GazpromWhat exactly was stolen from Gazprom?

9.65%18.4103.51997-2001Total

2.26%4.324.389%2000-2001Severneftegasprom

0.98%1.910.649%1999Vostokgas

1.16%2.212.549%2000Achimneftegas

1.04%211.135%1999Sibneftegas

1.33%2.514.238%1997-2001Tarkosaleneftegas

1.62%3.117.451%1997-2001Rospan

1.25%2.413.481%1998-1999Purgas

% ofTotal

GazpromReserves

Reserves,BOE

Reserves,Trillion

CF% LostDateCompany

Case Study: GazpromPerception vs. Reality

Market Perception Hermitage’s Analysisvs.0%

20%

40%

60%

80%

100%

98% Stolen Assets

2%Assets in

Place

9.7% Stolen Assets

90.3%Assets in

Place

+163%

0.05

0.15

0.25

0.35

0.45

0.55

0.65

0.75

0.85

October-00 December-00 March-01 May-01 August-01 October-01 January-02 March-02

"The FT has learned of one case in which Gazprom has been awarding large contracts to a company which is majority owned by the relatives of Gazprom's …management" Financial

Times

"Gazprom has sold shares at below market prices, ... to Stroytransgaz, … a company, majority owned by Gazprom managers and their relatives" Business

Week

"In the past two years, Gazpromhas quietly shuffled roughly two trillion cubic meters of gas reserves into ventures … owned by Itera" Wall Street Journal

“Gazprom … has transferred hundreds of millions of dollars in assets while signing … deals with a firm largely owned by Gazprom’sdirectors …” Washington Post

Resignation of Gazprom CEOMr. Vyakhirev

10% shareholders of Gazprom demand independent Audit of

Gazprom

Hermitage exposes Pricewaterhouse'sfaulting accounting of asset stripping at Gazprom

$US/ Share

Case Study: GazpromStarted its way to US$ 6 per share

Hermitage Performance

Performance of Hermitage Fund vs. CSFB ROS Index

Hermitage

CSFB ROS Index

423%

188%

188%7%-7%255%20%79%22%CSFB ROS Index423%27%-8%423%68%95%26%Hermitage Fund

SinceInception5 Years4 Years3 Years2 Years1 YearYTDTotal Return

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

Febru

ary-97

July-

97Dece

mber-97

May-98

October-

98Mar

ch-99

August-

99Ja

nuary-0

0

June-0

0Nov

ember-

00April

-01Sep

tember-

01Feb

ruary

-02

Russia Rising?

APRMARFEBJANDECNOVOCT0201

200

180

160

140

120

100

80

Oct. 2001 = 100

Dow Jones Industrial Average

Russian RTS Index

Land Mass: Russia ≅≅≅≅ 2 x U.S.

Economy: Russia ≅≅≅≅ Massachusetts

2/3 of U.S.

1/4 of U.S.

Russia

U.S.

1/4 of U.S.

1/3 of U.S.

Russia vs. U.S.: 200 Years of Economic Development

2001199019131800

35000

30000

25000

20000

15000

10000

5000

0

GDP Per Capita

02E019997959391898785

12000

10000

8000

6000

4000

2000

Thousand Barrels Per Day

Russian Oil Production

Saudi Arabia

Russia

Russia Oil Exports To …

Other18%

Central Europe

19%

South & Central America

4%

USA1%

Western Europe

58%

Russia’s Best Export… Human Capital

Human Capital Exports 41%

All Other Exports 59%

$84.9 billion $59.4 billion

Russia Exported 32 $bn of Human Capital to Israel, Germany and the USA in 2001

$5 billion$25 billion

$9 billion

World in 2002 ?

U.S.Japan

GermanyU.K.

CanadaFrance

ItalyAustralia

SpainTaiwan

S. KoreaMexico

BrazilRussia

ChinaIndia

40

30

20

10

0

GDP Per Capita, US$ Thousands37.3

31.9

25.925.524.924.6

21.320.1

16.613.9

9.5

6.1

3.02.41.00.5

Russia: International Reserves

$32.8 Billions

2001200019991998199719961995

35

30

25

20

15

10

5

0

US$ Billions